Growth to pick up with easing of political uncertainty

• Economic growth impacted by Easter attacks to hit 18-year low this year 
• Growth to pick up 4Q2019 due to election spending, loose monetary policy 
• Private credit to decelerate 5% this year despite CB’s lending rate caps
• Expects stock market to adopt upward trajectory over next 12 months

By Nishel Fernando 

First Capital Research (FCR), a Colombo-based equities research house, expects Sri Lanka’s economic growth to pick up to 4.1 percent next year with possible easing of political uncertainty following the Presidential Election scheduled for next month.

However, FCR estimates economic growth, impacted by the Easter Sunday attacks, to hit an 18-year low this year to 2.2 percent. 

“With the elections in 4Q2019, the pickup in consumer demand may continue in 1H2020 in an accelerated manner boosting GDP growth and consumer credit. We expect a significant recovery in GDP growth supported by the lower interest rate environment,” FCR Head of Research, Dimantha Mathew said.

He made these forecasts based on FCR’s Mid-Year Outlook 2019 themed ‘Fundamentals Strong; But Decisive Political Juncture’ at an event held in Colombo this week. 

According to FCR’s Mid-Year Outlook 2019, economic activities will begin to improve from the fourth quarter of this year driven by election-related spending and Central Bank’s loose monetary policy stance. 

Mathew projected that private sector credit growth this year would decelerate to 5 percent year-on-year (YoY) while noting that credit is unlikely to pick up until the second half of next year despite the imposed lending rate caps on banks, particularly given the lower liquidity position in the market.
“However, we expect the liquidity position to improve towards 1Q2020 amid possible inflows. Thereby, we expect it to lead to a decline in rates and rise in private sector credit growth. We expect 2020 credit growth to improve to 14 percent YoY.” 

On the political front, First Capital Research forecasts a new Prime Minister to be appointed following the Presidential Election and Parliamentary Election to be held in March next year, resolving the current political uncertainty.  

“We believe, immediately following the Presidential Election, a new Prime Minister will be appointed. Though remote, there is a possibility for it depending on the developments. The Parliament could be dissolved by February 17 giving leeway to hold Parliamentary Election by March 2020. “The completion of the election cycle is most likely to resolve the political uncertainty in the local front,” on FCR’s Mid-Year Outlook stated. 

Mathew pointed out that the outcome of the Parliamentary Election is likely to deliver a hung parliament.

“Though a multi-party government usually leads to slow decision making, we are most likely to see the president, government and provincial councils controlled by a single party or a single party together with minority parties, which may provide some stability,” he said.

As the economy picks towards 4Q2020, FCR expects to witness a possible weakness in currency, which may be counterbalanced by possible inflows
in the 1Q2020.

Mathew noted that the exchange rate is likely to record a moderate depreciation reaching Rs.183-188 against the US dollar by June 2020.  
Meanwhile, commenting on the capital market, Mathew pointed out that since one-year fixed deposit interest rates offered by banking sector declined to 9.83 percent in July, ASPI rose by over 600 points by August. 

FCR expects Colombo Stock Exchange’s (CSE) All Share Price Index (ASPI) to reach 6,000 by end-2019 and 6,500 by June 2020.

 “The ASPI, we believe has recovered to a ‘disbelief stage’ from ‘depression stage’ following the decline in interest rates. Decline in interest rates is likely record heavy dip in finance costs for most companies while possible rise in consumer demand and credit growth may grow earnings of bulk of listed companies.  “We expect the market to adopt an upward trajectory over the next 12 months as we expect the ASPI to reach the next stages of the market cycle, the ‘hope’ stage and the ‘optimism’ stage,” Mathew elaborated. 

First Capital also expects significant rise in foreign direct investment (FDI) inflows next year with anticipated investments to Colombo Port City and Hambantota Port, particularly from China.